The Hindu Business Line : German economy regains confidence, but concern is rising euro

With latest revelation that business confidence in Germany grew for the ninth month in January, the future outlook for German economy has stayed at a fresh nine-year high, according to a closely watched survey.

Brussels , Jan 29

EUROPE'S `locomotive economy' and the world's third largest (GDP $4.7 trillion) the German economy is displaying a fresh spurt with rising business confidence, for the ninth month in January.

For the first time in recent years, German businessmen are greeting foreign visitors with a wry smile with their order books bulging. They almost look overwhelmed with recently found business confidence.

The euro - European Union's common currency - has appreciated by 20 per cent within the last 12 months and is currently trading almost 50 per cent higher against the dollar, since the euro hit its lowest (0.89 cents) against the dollar this time two years ago.

The German Chancellor, Mr Gerhard Schroeder, who is heading a centre-left coalition Government of Social Democrats and The Greens (Environmentalists), is engaged in a politically sensitive task of reforming the German welfare and employment laws, which have been ``rigid, inflexible and far too expensive'' for German employers.

For example, a skilled German worker is costing almost 40 per cent more to an employer, compared to his counterpart in the US and Japan. With the rising value of euro and high labour costs and with no easy and flexible hire-and-fire mechanism - most German employers have been deeply pessimistic about future growth prospects for some time.

However, it is also ironical to note that Germany despite such overwhelming handicaps on the labour and currency fronts continues to report a slow but steady rise in its export performance in the global market place. With the latest revelation that business confidence grew for the ninth month in January, the future outlook for German economy has stayed at a fresh nine-year high, according to a closely watched survey. However, there is underlying worry about the rising value of the euro and a common perception in German business circles would indicate that there is time for ``serious trouble'' if the euro hits the $1.30-mark. The euro is currently trading at 1.26 mark against the dollar and 1.30 is widely rated a ``danger level'', which could cut short euro zone's export-led recovery.

At that stage, the European Central Bank based in Frankfurt will need to take some ``daring initiatives'' to curb future growth of the euro against the dollar.

Nearly half of the European Union foreign trade is with the US and investment flows on both sides of the Atlantic have significantly surged.

The large European companies are busy scouting the US markets for lucrative bargains to consolidate their market presence in the US economy, which is growing four times faster than the European economies - or at rate of four per cent in the US against one per cent in the European Union. The latest economic numbers added to the growing signs that the German economy - Europe's largest and the world's third biggest after the US and Japan - will rebound in current year after three years of stagnation. This is reflected in the latest business confidence survey, released on Tuesday of some 7,000 business enterprises across Germany.

There is also a slow but sure shift in the German unemployment rate, which has crossed, the politically sensitive four million mark.

So far, rising equity markets in the euro zone region, low interest rate (hovering at 1.5 per cent mark against clients deposits) and strong global economic upsurge, is fuelling the newly found business optimism in Germany and the euro zone region.For the first time after four years of economic stagnation, German factories are boosting production, and many businesses are beginning to invest in new capital equipment.

But the rising euro and taped labour markets are a problem in Germany, which is also euro zone's biggest exporter. Businesses want to cut costs and are servicing new demand by improving productivity. This is the secret of the current German business strategy.

Germany is India's largest trading partner in the euro zone region and German investment flows to India rank third largest after the US and Britain.